Winners and Losers: Creative Destruction and the Stock Market

Leonid Kogan, Dimitris Papanikolaou ,Noah Stoffman

June 2, 2015

Abstract
We develop a general equilibrium model of asset prices in which the bene ts of technological innovation are distributed asymmetrically. Financial market participants do not capture all the economic rents resulting from innovative activity, even when they own shares in innovating rms. Economic gains from innovation accrue partly to the innovators, who cannot sell claims on the rents that their future ideas will generate. We show how the unequal distribution of gains from innovation can give rise to a high risk premium on the aggregate stock market, return comovement and average return di erences among growth and value rms, and the failure of
traditional representative-agent asset pricing models to account for cross-sectional di erences in risk premia.